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Principal-Agent Problems with Exit Options

Cvitanić, Jakša and Wan, Xuhu and Zhang, Jianfeng (2008) Principal-Agent Problems with Exit Options. B.E. Journal of Theoretical Economics, 8 (1). Art. No. 23. ISSN 1935-1704.

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We consider the problem of when to deliver the contract payoff, in a continuous-time principal-agent setting, in which the agent's effort is unobservable. The principal can design contracts of a simple form that induce the agent to ask for the payoff at the time of the principal's choosing. The optimal time of payment depends on the agent's and the principal's outside options. We develop a theory for general utility functions, while with CARA utilities we are able to specify conditions under which the optimal payment time is not random. However, in general, the optimal payment time is typically random. One illustrative application is the case when the agent can be fired, after having been paid a severance payment, and then replaced by another agent. The methodology we use is the stochastic maximum principle and its link to Forward-Backward Stochastic Differential Equations.

Item Type:Article
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URLURL TypeDescription
Cvitanić, Jakša0000-0001-6651-3552
Additional Information:© 2008 The Berkeley Electronic Press. Submitted: April 13, 2008. Accepted: August 26, 2008. Published: October 6, 2008. An earlier version of this paper was titled “Optimal Contracting with Random Time of Payment and Outside Options.” We are very grateful to the editor and the anonymous referees for helpful suggestions that significantly improved the exposition of the paper. We are solely responsible for any remaining errors, and the opinions, findings and conclusions or suggestions in this article do not necessarily reflect anyone’s opinions but the authors’. Research supported in part by NSF grants DMS 04-03575, DMS 06-31298, DMS 06-31366, the grant DAG 05/06.BM28 from HKUST, and through the Programme “GUEST” of the National Foundation For Science, Higher Education and Technological Development of the Republic of Croatia.
Funding AgencyGrant Number
NSFDMS 04-03575
NSFDMS 06-31298
NSFDMS 06-31366
Hong Kong University of Science and TechnologyDAG 05/06.BM28
National Foundation For Science, Higher Education and Technological Development (Croatia)GUEST
Subject Keywords:principal-agent problems, real options, exit decisions, forward backward stochastic differential equations
Issue or Number:1
Record Number:CaltechAUTHORS:CVIbejte08
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Official Citation:Jaksa Cvitanic, Xuhu Wan, and Jianfeng Zhang (2008) “Principal-Agent Problems with Exit Options,” The B.E. Journal of Theoretical Economics: Vol. 8: Iss. 1 (Contributions), Article 23. Available at:
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:12521
Deposited By: Archive Administrator
Deposited On:12 Dec 2008 06:35
Last Modified:03 Oct 2019 00:29

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